Getting Paid When the Books Are Cooked: Exploring CEO Initial Pay in the Aftermath of Financial Fraud
When companies mess up, they often swap the boss to save face. Mads Emil Wedell-Wedellsborg, Dimitrios Georgakakis and Peder Greve reveal why the new CEO often steps into the job with a hefty compensation package compared to their peers.
The wider impact of financial misconduct
In an era of growing scrutiny around corporate ethics and accountability, the consequences of financial misconduct extend far beyond the walls of any single firm. When some of the world’s largest companies are found to be engaging in financial misconduct, the ripple effects are felt by a wide range of stakeholders – not just employees and investors, but also customers, regulators and the broader public. Understanding how firms respond to such misconduct is therefore essential.
How do firms respond to scandals?
A key area of interest lies in the immediate responses following a financial scandal. Do these firms take meaningful strategic action? Is leadership held accountable? Or is responsibility deflected in an effort to protect the firm’s reputation? One of the most common initial responses is to replace the CEO, a move often seen as a signal to the market that the firm is taking its misconduct seriously and is committed to change.
Exploring CEO pay after misconduct
What does it really mean to bring in a new CEO after a scandal? How does the company approach their compensation? And what risks does the new leader inherit by stepping into a firm in crisis?
The research project explores precisely how companies respond in such cases, focusing on how CEO pay is shaped by succession following financial misconduct. This topic is particularly relevant amid ongoing debates over executive compensation and income inequality; especially as critics continue to question whether soaring CEO pay truly reflects added value by the more talented individual, or is a consequence of an excessive risk-taking culture.
What the data reveals
Using data from US public companies between 1999 and 2021, the project compares the initial compensation of CEOs hired after financial misconduct with those in comparable firms that did not face such violations. By matching firms by size and industry, the analysis isolates the effect of misconduct and can, therefore, identify any differences caused by the malpractice.
The findings are striking: CEOs stepping into firms caught in financial misconduct tend to receive significantly higher compensation. This suggests that companies may use financial incentives to attract top talent in an attempt to restore their reputation and ameliorate the stark job demands, even if it may inadvertently lead to higher risk.
A risk premium or a governance failure?
While this may seem like a rational response, it raises pressing questions: Are these higher pay packages justifiable risk premiums to ensure that the firm hires the right talent to restore its reputation and practices, or do they represent a failure in the corporate governance structure, whereby firms – and their leaders – are not held sufficiently accountable? Do existing rules aimed at regulating excessive executive pay work, especially in moments of crisis, or is there a need to rethink how policies can address CEO compensation?
These are the kinds of questions that must be asked to promote effective governance and ensure trust in the corporate sector.
Towards fairer corporate governance
The research doesn’t just offer insight into how firms respond to scandal – it invites a broader debate about leadership, accountability and fairness in today’s business world.
Authors
Mads Emil Wedell-Wedellsborg
Lecturer in International Business and Strategy
Mads Emil Wedell-Wedellsborg is a Lecturer in International Business and Strategy, and Programme Director for BSc Business and Management (HR & OB) at Henley. His research interests are in the areas of strategic leadership, top management team composition and multinational enterprises.
See Mads' profile
Dimitrios Georgakakis
Professor of International Business, University of Leeds
Dimitrios Georgakakis is a Professor of International Business at the Department of International Business, University of Leeds and the Director of the Centre for International Business at the University of Leeds (CIBUL). He is an Associate Editor at the Journal of Management Studies, and an Editor Oversight of JMS Says. His research has been published in several academic outlets.
Dr Peder Greve
Associate Professor in International Business
Peder Greve is an Associate Professor in International Business, and Postgraduate Research Director of International Business and Strategy at Henley. He publishes research in the areas of strategic leadership and international business strategy.
See Peder's profile
